Citation: 2005TCC744
Date: 20051129
Docket: 2003-2532(IT)I
BETWEEN:
STUART BIRD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre, J.
[1] These are appeals from assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 1998, 1999 and 2000 taxation years.
[2] At the outset, the appellant withdrew his appeal for the 2000 taxation year as he had not filed a notice of objection with respect to that year, as required by subsection 169(1) of the Act in order for a notice of appeal to be validly filed.
[3] In assessing the appellant for the 1998 and 1999 taxation years, the Minister, among other things, added to his income amounts of $21,526 and $14,048 as shareholder benefits pursuant to subsection 15(1) of the Act. The so-called shareholder benefits are, according to the Minister, personal expenses of the appellant that were assumed by Renova Corporation Inc. ("Renova"), of which the appellant is the owner, president and sole shareholder. Those expenses are itemized in Schedule A to the Reply to the notice of appeal and reproduced below:
SCHEDULE A
SHAREHOLDER'S BENEFIT ASSESSED - PERSONAL EXPENSES
AS PER NOTICES OF ASSESSMENT, DATED JUNE 6, 2003
|
EXPENSE
|
1998
|
1999
|
2000
|
|
Motor vehicle
|
$ 1,225
|
$ 1,355
|
$ 448
|
|
Meals and Entertainment
|
$ 4,726
|
$ 2,725
|
$ 2,156
|
|
Travel
|
$ 3,274
|
$ 2,030
|
0
|
|
Office supplies
|
$ 538
|
$ 687
|
0
|
|
Mileage
|
$ 4,393
|
$ 5,750
|
$ 5,459
|
|
Parking
|
$ 1,309
|
$ 983
|
$ 950
|
|
Additions to Capital Cost
|
$ 6,061
|
$ 518
|
0
|
|
Total
|
$21,526
|
$14,048
|
$ 9,013
|
[4] Ms. Rajashree Narayan, an auditor with the Canada Customs and Revenue Agency ("CCRA"), testified to explain why the expenses referred to above were included in the appellant's income as shareholder benefits.
[5] With respect to the motor vehicle and meal and entertainment expenses, these expenses that were claimed by Renova as business expenses were considered by the CCRA as personal expenses of the appellant. The motor vehicle expenses related to mileage and parking and were incurred mostly when the appellant travelled to meet his son, daughter and spouse at various restaurants and at movie theatres ($100 over three years for movie tickets). These meetings happened three or four times a week and sometimes more often. More than 50 per cent of the meal and entertainment expenses claimed by Renova were related to the family meetings. Those expenses were described in Renova's books as being for "director's meetings", although the appellant was the sole director of the corporation.
[6] In the corporation's books, a credit was posted to the "due to shareholder's loan" account for those expenses. By reducing that account, the corporation was reducing any amounts that it had showed in its books as owing to it by the appellant (shareholder).
[7] The CCRA found in the first place that these expenses claimed by the corporation were unreasonable and were personal expenses of the appellant, and in the second place, that there was a benefit conferred on the appellant through the reduction of his shareholder's loan account by corresponding amounts.
[8] With respect to the travel expenses, for 1998 these were related to a so-called annual director's meeting that took place in Orlando, Florida. The meeting was with the appellant's family. Although the appellant said during the audit that he organized this meeting to discuss future business possibilities and the possibility of his son's working for the corporation in the future, Ms. Narayan found that it looked more like a personal vacation than a legitimate business meeting. As a matter of fact, some of the expenses claimed by the corporation for that trip were for visits to Universal Studios and Disney World. Furthermore, the corporation did not do, and did not plan to do, any business in Florida. Included in the travel expenses claimed were air tickets, passports for the appellant's children, photographic supplies and the development of photographs.
[9] Here again, the corporation had credited the majority of those expenses to the "due to shareholder's loan" account, and few of the expenses were paid directly by the corporation from its bank account. In the CCRA's view, there was a benefit conferred on the appellant as a shareholder of the corporation.
[10] For 1999, the travel expenses claimed were related to a trip to Cubaand were described in the corporation's books as being for an annual director's meeting.
[11] The appellant explained during the audit that the trip to Cubahad two purposes. The first had to do with the possibility of developing vacation properties there. The second was related to the corporation's involvement in developing travel guide type books on scuba diving in Cuba.
[12] However, Ms. Narayan said that the appellant never produced any travel writings that he had published. No income was earned from travel writings. No drafts of travel guide manuscripts were exhibited to the CCRA. The appellant was not able to show that he had approached any newspapers, publishers or editors about his travel writings. He never received any feedback from the Cuban government on the travel guide project. With respect to the possibility of developing vacation properties in Cuba, no property was ever purchased and no serious steps were taken to purchase anything there. There was no business plan relating to property development. Again, only a few expenses related to the Cubatrip were directly paid by the corporation and the other expenses were recorded as a credit to the "due to shareholder's loan" account. Ms. Narayan concluded that these travel expenses were personal expenses of the appellant and that the corporation conferred a benefit on him in assuming the expenses.
[13] With respect to the office supplies, these were expenses incurred to purchase CDs, tapes, earphones and a CD player. The appellant said to the auditor that he needed these items to minimize background noise at clients' work sites. However, he also said that more than 60 per cent of his work was done at his home office. The expenses also included the purchase of history books, non-fiction works on war history, works on mythology, and novels, none of which had anything to do with the systems consulting business operated by Renova. All these expenses were considered personal by the auditor. As they were recorded as a credit to the "due to shareholder's loan" account in the corporation's books, they were considered by the CCRA as a benefit to the shareholder.
[14] As to mileage and parking, these expenses were related to the appellant's commuting to clients' work sites from home. Although the appellant told the auditor that his usual place of work was at home (60 per cent of his work was done from home), the auditor had the impression that he was spending most of his work time and performing his contractual obligations on clients' premises. Her reason for thinking so, she said, was that the appellant did not give her his home phone number for the purpose of reaching him, but rather a cellular phone number and the phone number of the client for whom he was working at the time of the audit (in 2002). She also mentioned that in at least two contracts it was indicated that the work had to be done on site. Ms. Narayan noticed as well that the appellant reported mileage and parking expenses for as many as 20 to 22 days per month at different client locations and claimed amounts for full-day parking close to clients' sites (see the second page of Exhibit A-1). She said that the appellant even occasionally purchased monthly parking. She therefore considered that the appellant's usual place of work was not his home and therefore the expenses claimed for commuting to work sites were personal in nature. As these expenses were credited to the appellant's "shareholder's loan account" with the corporation, she considered that there was a benefit conferred on the appellant as a shareholder.
[15] Lastly, the additions to capital cost refer to personal assets that were transferred by the appellant into his corporation. Such assets were books not related to software consulting, decorative objects, a stereo system and a camera (see first page of Exhibit A-1). The appellant said to the auditor that he did not meet clients at home. She therefore considered that these items were not used for the purpose of earning income. According to her, spy novels and science fiction novels were personal interests of the appellant, and not a legitimate business interest. The appellant has only published one technical book, in 1983, and has never declared any income earned from it. He has also prepared papers that he presented at conferences that have been recorded on CD-ROMS (see Exhibit R-1), but he has published nothing in magazines or elsewhere. As the cost of all the above items was credited to the "due to shareholder's loan" account of the corporation, the CCRA considered that this was a benefit conferred by the corporation on the appellant as a shareholder.
[16] At trial, the appellant described his home office as being the place where he did his writing and drew up proposals for contracts. In October 1998, he moved into a house in Woodlawn, Ontario, in which he had a large computer room (18' x 28') with six computers, four printers, a scanner, a computer desk, a filing cabinet and various operating systems. He also had a conference room (8' x 12') that was never used, a corporate administrative office (8' x 12') and an assembly area (8' x 12'). In total, about 750 square feet of his home were devoted to office space. All the corporate records were kept there and the corporation's mail was sent there too.
[17] The appellant obtained through Renova contracts for work with private firms and the Treasury Board. In a questionnaire filled in by him and filed as Exhibit A-2, the appellant indicated at question 25 the approximate portion of his work that was completed at his home office. The answer shows that, depending on the contract, the appellant in some cases worked mostly from home, and in others, from the client's site. From the questionnaire I note that the division is approximately half and half. The appellant also explained that he wrote all his proposals at home.
[18] According to the appellant, only 10 per cent of the time do tenders submitted by him materialize into contracts. He claimed mileage and parking expenses when he worked at a client's site or when he needed to consult people and meet with current and potential clients. The appellant testified that, when he was working at a client's site, he was not provided with a specific office. In some places (for his largest contracts), he had a desk that was provided to him because he had to work on site on the data system. He also sometimes needed access to the client's main terminal.
[19] The respondent called Ms. Dalal Esber, a manager of data architecture at Human Resources Development Canada ("HRDC"). This witness said that the appellant worked for their organization in 1999. She was not certain, but her recollection was that the appellant had to share an office on HRDC premises at the beginning of his contract (for the first two months). For the bulk of the one-year contract, she said, the appellant would normally have had an office available to him. She said that the appellant would generally be present on HRDC premises during regular business hours from Monday to Friday. This witness acknowledged, however, that a lot of consultants work from their homes due to a lack of offices on their clients' premises. She said that 75 per cent of the time, nonetheless, the consultants were present on site.
[20] The appellant testified that he was the sole employee of Renova. His son, a web developer, apparently did subcontract work for Renova through his own corporation. His daughter worked as an editor. They both left home in the summer of 1998 to live in an apartment in downtown Ottawa.
[21] The appellant testified that half of his home belongs to his wife, who is a schoolteacher. He said that she painted and cleaned the house and was acting as an advisor for the corporation. He testified that he held meetings with his children and his wife downtown, mostly during lunchtime, because he did not want to pay taxi fare for them to come to Kanata, where he lives. He did not pay his children for attending those so-called meetings.
[22] With respect to the writing business, the appellant said at trial that he published books and received royalties from that activity. He did not file anything, though, to support this claim. There is no evidence of any royalties declared in the corporation's tax returns either.
Arguments of the parties
[23] The appellant argued that the expenses in question were reasonable expenses for which his corporation reimbursed him in his capacity as an employee. The corporation did not have a car and its place of business was the appellant's home. According to the appellant, he did not receive any benefit from Renova by virtue of his being that corporation's sole shareholder, and while he was reimbursed for his expenses, these were for negotiating contracts on the corporation's behalf as an employee thereof.
[24] He argued that subsection 15(1) of the Act is not applicable here and that, pursuant to subparagraph 6(1)(b)(v) of the Act, none of the expenses at issue are taxable in his hands as the reimbursement qualifies as a reasonable allowance for travel expenses received by an employee from his employer in connection with the negotiating of contracts for that employer.
[25] The appellant argued that the expenses incurred to entertain his children and spouse were business expenses. Renova could not afford to pay for a consultant and so, the appellant said, his whole family was working on a Y2K project proposal on behalf of Renova.
[26] In the appellant's view, the project in Cubawas also a business venture and it is unreasonable for the CCRA to second-guess the business intentions of the corporation.
[27] The respondent argued that the appellant received from his wholly-owned corporation benefits within the meaning of subsection 15(1) of the Act. In her view, there is no evidence that the appellant was an employee of Renova (that is, no evidence of T4s having been issued, or of salary expenses having been claimed by the corporation, or of amounts having been withheld at source).
[28] The respondent argued that even if the appellant was an employee of Renova, the question to be asked is in what capacity he received a benefit.
[29] It was said in Minister of National Revenue v. Pillsbury Holdings Ltd., [1965] 1 Ex. C.R. 676, quoted with approval in Canada v. Fingold (C.A.), [1998] 1 F.C. 406, [1997] F.C.J. No. 1250 (QL) (FCA), that a corporation normally makes payments to shareholders in the form of dividends unless the payment is part of a bona fide business transaction, in which event, it is not a benefit accruing to the shareholder qua shareholder. In Youngman v. The Queen, 90 DTC 6322, [1990] F.C.J. No. 341 (QL) (FCA), it was stated that a shareholder receives no benefit for the purposes of subsection 15(1) if, in the same circumstances, he would have received the same benefit from a company of which he was not a shareholder.
[30] It is the respondent's view that the appellant would never have received the benefits in question here but for his status as sole shareholder of the corporation. Indeed, a corporation operating at arm's length from the appellant would not have conferred these benefits upon him, as the expenses at issue were personal expenses of the appellant.
[31] With respect to the travel expenses for the trip to Cuba, the respondent argued that these expenses were not related to activities that were carried on in accordance with objective standards of businesslike behaviour. Neither the appellant nor his corporation has published anything nor has the appellant contacted any publishers, agents or editors in the fields of travel, science fiction and spy novels, nor has he earned a cent from any writings in these genres. The same can be said of the appellant's interest in developing property in Cuba. No steps were undertaken to buy any property; no agents were retained; no potential properties were identified. In the corporation's tax returns for 1998 and 1999 (Exhibits R-2 and R-3), there is no income percentage recorded with respect to any of these activities, the sole commercial activity of Renova shown being consulting.
[32] With respect to mileage and parking, the respondent is of the view that the usual place of work of the appellant was not at his home but at his clients' sites. Counsel for the respondent therefore concludes that the appellant's travel between home and his usual place of work was a personal expense (see Daniels v. The Queen, 2004 DTC 6276 (FCA)).
[33] Finally, the respondent is of the view that subparagraph 6(1)(b)(v) of the Act does not apply here as the travel expenses were not incurred for the purpose of negotiating contracts for the employer, but solely for the purpose of performing work at the usual place of work on the clients' sites.
Relevant statutory provisions
[34] Paragraph 6(1)(b)(v) reads:
Inclusions
SECTION 6:
(1) Amounts to be included as income from office or employment. There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:
. . .
6(1)(b)
(b) Personal or living expenses - all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except
. . .
(v) reasonable allowances for travel expenses received by an employee from the employee's employer in respect of a period when the employee was employed in connection with the selling of property or negotiating of contracts for the employee's employer . . . .
Subsection 15(1) reads in part as follows:
SECTION 15:
(1) Benefit conferred on shareholder. Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation . . .
. . .
the amount or value thereof shall . . . be included in computing the income of the shareholder for the year.
Analysis
[35] The object of subsection 15(1) of the Act was described in Pillsbury Holdings Ltd., supra (referring to its statutory predecessor, subsection 8(1) of the Income Tax Act, R.S.C. 1952., c. 148), as follows at pages 682, 683 and 684, QL paragraphs 16, 18, 19 and 21:
The normal payments and distributions by a corporation to a shareholder qua shareholder are
(a) dividends during the lifetime of the corporation,
(b) payments and distributions in respect of reductions in capital during the lifetime of the corporation, and
(c) payments and distributions on the occasion of the winding-up of the corporation.
. . .
. . . While the subsection does not say so explicitly, it is fair to infer that Parliament intended, by section 8, to sweep in payments, distributions, benefits and advantages that flow from a corporation to a shareholder by some route other than the dividend route and that might be expected to reach the shareholder by the more orthodox dividend route if the corporation and the shareholder were dealing at arm's length. . . .
Paragraph (c) of subsection (1) of section 8 may be expected, therefore, to apply to cases where benefits or advantages have been conferred on a shareholder in such circumstances that the effect is, in substance, equivalent to the payment of a dividend to the shareholder. . . .
. . .
. . . there are transactions between closely held corporations and their shareholders that are devices or arrangements for conferring benefits or advantages on shareholders qua shareholders and paragraph (c) clearly applies to such transactions. . . . It is a question of fact whether a transaction that purports, on its face, to be an ordinary business transaction is such a device or arrangement.
[36] In Servais v. The Queen, 2003 DTC 5597 (FCA), the Federal Court of Appeal dealt with the issue raised here by the appellant, namely whether a benefit attributed to a person was attributed to that person in his capacity as an employee rather than in his capacity as a shareholder. Sharlow J.A. stated the following at paragraphs 14, 16 and 17:
[14] Put simply, any use by a shareholder of corporate property is potentially subject to tax under subsection 15(1). . . .
. . .
[16] I turn now to the first argument, which is that Mr. Servais' use of the Ford Ranger was attributable to his status as an employee, not his status as a shareholder. . . .
[17] In any case, it would appear that if the Tax Court Judge had held that Mr. Servais was permitted to use the Ford Ranger only because he was an employee, the result would simply be that the taxable benefit would have been taxed under section 6 of the Income Tax Act, rather than section 15. Although the Tax Court pleadings were not included in the record, the panel was advised that the Crown had raised section 6 in its pleadings as an alternative basis for the assessment. In my view, the analysis relating to section 15 would apply as well to section 6. Thus, an employee who derives a personal benefit, qua employee, from the use of any motor vehicle owned by his employer is subject to tax under section 6. If the motor vehicle meets the definition of "automobile", the value of the benefit must be determined as a standby charge under paragraph 6(1)(e). In any other case, the value of the benefit must be determined on the basis of the principles in the jurisprudence.
[37] In Youngman, supra, Pratte J.A. summarized the principles governing the application of subsection 15(1) as follows at page 6325 DTC:
It is now well settled that paragraph 15(1)(c) applies only when a shareholder has received, qua shareholder, a benefit or advantage from a corporation. . . . A shareholder receives no benefit for the purposes of paragraph 15(1)(c) if, in the same circumstances, he would have received the same benefit from a company of which he is not a shareholder.
[38] I agree with counsel for the respondent that, with the exception of the mileage and parking expenses, all the expenses claimed (motor vehicle, meals and entertainment, travel, office supplies, additions to capital cost) were personal expenses of the appellant and that those expenses would not have been reimbursed by a corporation of which he was not a shareholder. The motor vehicle and meal and entertainment expenses were related to family meetings. The evidence disclosed that the son worked through his own corporation, that the daughter, an editor, was not really involved in the appellant's business, and that the appellant's spouse was a schoolteacher. The appellant did not convince me that those family meetings occurred for business purposes. Apart from the appellant himself, no one testified on his behalf, and the evidence does not disclose that Renova remunerated, or subcontracted work out to, the appellant's spouse and daughter. As for his son, it seems from the questionnaire filed as Exhibit A-2 that only in 2000-2001 did he start subcontracting for Renova. There is no other evidence that he worked for the appellant's corporation during the period at issue.
[39] With respect to the travel expenses, for 1998 they were related to a family trip to Florida. No business was conducted there. This was in my view a personal getaway.
[40] For 1999, the travel expenses were related to a trip to Cuba. The appellant has not convinced me that he or his corporation intended to carry on an activity for profit in that country. At least, there is no evidence to support the existence of any such intention. Indeed, I am not convinced that the appellant's or Renova's predominant intention was to make a profit from writing activities or from the purchase of properties in Cuba or that these activities had been carried on in accordance with objective standards of businesslike behaviour (see Stewart v. Canada, [2002] 2 S.C.R. 645, [2002] S.C.J. No. 46 (QL), at paragraph 54). I am of the view that this trip was more personal in nature and was not related to activities carried on in a commercial manner.
[41] With respect to the office supplies and additions to capital cost, the evidence revealed that in the latter case the items involved were personal objects (such as music and books in fields having nothing to do with the corporation's consulting business), that were not related to the corporation's business. The appellant also acknowledged that he never received clients at his home office.
[42] I therefore consider that these were personal expenses that were charged to Renova. There was conferred on the appellant, as the sole shareholder of that corporation, a benefit within the meaning of subsection 15(1) of the Act that had to be included in his income for the taxation years at issue. It is obvious that, had he not been a shareholder of the corporation, such expenses would not have been reimbursed. Furthermore, even if the appellant was an employee of Renova, as the Federal Court of Appeal said in Servais, supra, the same analysis applies to an employee who receives a personal benefit, qua employee, from his employer. If not taxable under section 15, he would nonetheless be subject to tax under section 6 of the Act.
[43] With respect to the mileage and parking expenses, however, the appellant has convinced me that his home office was his usual place of work. The work space occupied a large part of the appellant's home. All the corporate records were kept there and it was the business address of the corporation. The appellant testified that he drew up all his proposals at his home office, and that of these only 10 per cent materialized into actual contracts for Renova. Exhibit A-2 shows that approximately half of the contracts required the appellant to work at the client's site. Otherwise, he worked from his home. Even Ms. Esber from HRDC testified that a lot of consultants worked from their homes.
[44] As a matter of fact, we see from the second page of Exhibit A-2 that the appellant spent more days at the client's site when he was working on contracts that required him to work less at home. I do not find, however, that a consultant's having to work on a client's premises is reason for saying that his usual place of work is not his home office. In Daniels v. The Queen, 2004 DTC 6276 (FCA), it was recognized that where a person has two places of work and the trips that gave rise to the claims for expenses were for travel from one place of work to the other, such expenses were not personal but were incurred in the performance of that person's duties (see Campbell et al. v. the Queen, 2003 DTC 420 (TCC)).
[45] I therefore consider that the mileage and parking expenses totalling $5,702 ($4,393 + $1,309) in 1998 and $6,733 ($5,750 + $983) in 1999 were not personal expenses but were incurred for the purpose of earning business income. The appellant did not receive a benefit as a shareholder within the meaning of subsection 15(1) by being reimbursed by the corporation for those expenses. Furthermore, the respondent did not argue that the amounts thereof should be included in the appellant's income as a taxable allowance received in the course of his employment, pursuant to section 6 of the Act. In fact, the respondent even disputed the fact that the appellant was an employee of Renova, and anyhow no evidence was brought before the Court to support that view.
[46] Accordingly, the appeals will be allowed without costs and the assessments referred back to the Minister for reconsideration and reassessment on the basis that the shareholder benefits to be included in the appellant's income shall be reduced by an amount of $5,702 for 1998 and $6,733 for 1999.
[47] The appeal from the assessment for the 2000 taxation year is quashed.
Signed at Ottawa, Ontario, this 29th day of November 2005.
"Lucie Lamarre"
Email this Content